My top FTSE 250 growth stock to buy today is Diploma (LSE: DPLM). I believe this business flies under the radar for most investors because it fulfils a relatively unexciting role in the manufacturing chain.
It supplies and distributes components for three primary sectors: controls, seals and life sciences. For example, in the controls division, the company supplies specialist wiring and cable connectors for specialist manufacturers.
This business model hardly gets the pulse racing. However, I believe the company fulfils a unique niche, which gives it a competitive advantage. And this is the primary reason why I would add the FTSE 250 growth stock to my portfolio today.
As the business continues to expand and develop, it can continue to grow profits at an attractive rate and produce desirable returns for investors.
Expansion plans
Since 2016, Diploma’s sales and net profits have grown at a compound annual rate of 16% and 13% respectively. The company’s top- and bottom-line expansion results from its organic growth and bolt-on acquisition strategies.
The company is primarily looking for high-quality, scalable business opportunities. These are where management can increase revenue with minimal capital spending. During the financial year to the end of September, the group acquired 10 businesses for £456m.
Further acquisitions are planned. But the corporation will only acquire a business if it meets its strict returns targets. It has to achieve a double-digit return on assets with room to grow and expand this return.
While past performance should never be used as a guide to future potential, if management continues to adhere to this strict acquisition roadmap, I think the company can maintain the impressive growth rate it has achieved over the past six years.
It certainly looks as if the enterprise is on track to report a strong performance in its current financial year. Underlying revenue growth hit 16% in the three months to the end of September. Organic growth initiatives and recent acquisitions helped power the company forward.
FTSE 250 growth stock risks
Still, while the corporation has a good track record of growth, there is no guarantee this will continue. Challenges the company could encounter include high interest rates, which would raise the cost of its debt.
Competition in the sector could also drive prices for acquisitions above the level it is willing to pay. This would ultimately lead to lower returns and a slowdown in growth.
Despite these potential challenges, I think the outlook for the company is incredibly exciting. By pursuing a growth strategy in a unique niche sector, Diploma has the potential to continue growing over the next decade.
What’s more, with sales of less than £1bn, the group is still a relatively small enterprise in the grand scheme of things. With such a long runway ahead, I would be more than happy to add this FTSE 250 growth stock to my portfolio right now.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
